Q4 2019 Earnings Call
Good afternoon. My name is for me and I will be your conference facilitator today at this time I would like to welcome everyone to microns fourth quarter 2019 financial release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there.
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Thank you.
Welcome to Micron Micron Technologys fourth fiscal quarter 2019 financial conference call.
On the called with me today, our subject matter, it, though president and CEO and did since though chief financial Officer.
Today's call will be approximately 60 minutes and Lynn.
This call, including the audio and slides is also being dropped us from our Investor Relations website at Investor Duck Micron Dot com.
In addition, our website contains the earnings press release, Yeah, I'm not prepared remarks find a shock while ago.
Today's discussion of financial results will be presented on a non-GAAP financial basis, unless otherwise specified.
Conciliation of GAAP to non-GAAP financial measures can be found on our website, along with the convertible debt and capped call dilution table.
But in mind of webcast replay will be available on our website later today.
We encourage you to monitor our website at <unk> Micron dot com throughout the quarter for the most current information on the company, including information lumber videos financial conferences that we will be attending.
You can follow us on Twitter micron debt.
As I remind you the matters, we will be discussing today include forward looking statements.
These forward looking statements subject to risks and uncertainties that may cause actual results to differ materially from statements made today.
We refer you to the documents we filed with the PC.
Specifically, our most recent Form 10-K , and 10-Q for a discussion of the risks that may affect our future results.
Although we believe that the expectations reflected in forward looking statements are reasonable we cannot guarantee future growth levels of productivity performance or achievements. We are under no duty to update any of the forward looking statements. After todays bid to conform these statements to actual results.
I'll now turn the call over to Sanjay. Thank you for Han good afternoon.
2019 was another solid year of execution and we continue to transform the new micron. Despite the challenging industry environment. We achieved the second best year in our history of revenue fee cash flow and earnings which underscores the strength of the new micron.
The improved structural profitability by further reducing the technology gap that competitors and by strengthening our product portfolio.
We also made progress on our $10 billion share repurchase program, but you're turning to point in $7 billion to our shareholders.
In the fiscal fourth quarter, Mike Capone team's strong execution resulted in financial performance exceeding our guidance ranges.
Okay, Transweb broadly consistent with our expectations discussed on that last earnings call.
DRAM demand bonds back as the factors that impacted calendar first half demand largely dissipated.
Dan Elasticities, driving robust demand growth, causing industry inventories through improved rapidly.
One of the demand recovery in DRAM and NAND is encouraging we remain mindful of ongoing macroeconomic and trades uncertainties.
I will provide more color on our view of the market off so the review of progress on our key strategic objectives.
Since 2016, the actions we have taken to reduce our cost structure exceeds our mix of high value solutions and enhance our customer engagement and go to market strategy have significantly improved our profitability relative to our peers.
In fiscal 2019, our de them cost per bed declines led the industry and exceeded our internal plans. Despite the headwinds from our announced introduction and wafer starts.
In the fiscal fourth quarter, we began mass production and volume shipments are the industry's first one V products, giving micron feature size leadership for Dana.
We're also making good progress migrating more to follow production to leading edge nodes.
While we entered fiscal 2019 with more than half of our based production on 20 nanometer or older nodes. We ended the fiscal year with approximately three quarters on onex and beyond with a meaningful portion on one by.
As previously announced we're expanding clean room space in our Titan dive on site to support future nor transitions of our existing wafer capacity and we expect output from this facility in calendar 2021.
In NAND, we continued to outpace industry cost declines during fiscal 2019.
96 layer Threed NAND is continuing to increase as a portion of our mix.
Meanwhile, we achieved our first ceiling dies using replacement gate on RG for short.
This milestone further reduces the risk for our RG transition as a reminder, our first RG node will be a 128 layers and will be used for select set of products.
We don't expect RG to deliver meaningful cost reductions until fiscal 2021, when our second generation RG node is broadly deployed.
Consequently, we are expecting minimal cost reductions in NAND in fiscal 2020.
I would argue production deployment approach will optimize the ROI of our NAND capital investments.
In addition, we announced a grand opening of our Singapore clean room expansion in August , which will enable the transition of our existing NAND wafer capacity to future generations of Threed NAND technology.
We are continuing to made solid progress with our Threed Cross point product development and remain on track to launch our initial products in calendar 2019.
Now turning to highlights by market.
In ssds the industry transitions from set out to Nvme me in fiscal 2019 continued at a rapid rate.
While we have been late to the Nvme mean market our progress positions us to gain share starting in fiscal 2020.
For the Oems bundling on.
For Oems building on strong growth last quarter, we more than tripled revenue shipments of our nvme mean client SSD.
Sequentially, but sales penetration in multiple tier one PC Oems.
Our QST based envy any consumer as the was the best selling SSD on Amazon Prime day in North America, our consumer SSD segment achieved record revenue and unit shipments with bets boosting triple digit percentage growth year over year driven.
Hi, our strategy to pursue channel expansion that extends our geographical and customer leach.
Price elasticity is driving an increase in attach rates and capacities, leading to solid demand growth across client and consumer ssds.
We're also making solid progress on advancing our roadmap of Nvme SSD is for the enterprise and cloud markets.
In fiscal 2019, we introduced the high performance 9300 lineup nvme products targeting high end datacenter applications and are looking forward to increasing adoption of this product.
In mobile our portfolio featuring the industry's lowest power and highest density products is enabling our customers to bring differentiated capabilities to the market and helping us deliver outstanding financial performance in a challenging industry environment in fiscal 2019, we delivered mobile.
I knew that was down only 3% from 2018 record performance. Despite a significant drop in market pricing and the impact from the addition of quality to the entity list.
Our mobile margins was resilient and our managed NAND bit shipments in fiscal 2019 more than tripled year on year, driven by growth of Emcp and discrete NAND MMC and GFS products.
In the fiscal fourth quarter, we started volume shipments of a new leading edge you Fs based emcp that uses our bonzi LPD them.
This new USS Emcp will bring flagship like performance and densities to mid and high end smartphones.
We are also leading the industry in power efficient high bandwidth LP, five DRAM, which positions us well as fiveg begins to accelerate in 2020.
In data center customer inventories for DRAM have reduced significantly driving solid sequential demand growth for server solutions in both cloud and enterprise markets.
New processes platforms are also creating an uptick in demand for higher density and higher performance Dina modules.
In graphics, we saw strong sequential rate growth within thesis for graphics cards and gaming consoles as normal buying resumed following inventory reductions in DRAM.
In the PC market DRAM module and SSD shipments continued the growth trend from last quarter at GPU shortages further subsided.
In automotive, we continue to increase revenue year over year, despite weak auto industry unit sales and the challenging DRAM industry environment. Our growth was supported by secular content increases our superior quality and well established customer relationships.
And before shipments in the fiscal fourth quarter was over five times higher year over year as lower power demand becomes increasingly important for new infotainment and Adas systems.
We continue to have leading industry share in automotive.
Before talking about the market outlook I want to provide an update on our business with Ravi and the ongoing impact of trade uncertainties.
As we noted last quarter, we started shipping some products to validate that are not subject to export administration regulation and entity less restrictions.
In the fiscal fiscal fourth quarter sales to evolve a decline sequentially and were down meaningfully from the levels. We anticipated prior to the addition of quality to the entity list.
We have applied for licenses with the department of Commerce that would allow us to ship additional products, but there have been no decisions on licenses to date.
We see ongoing uncertainties surrounding us China trade negotiations.
If the entity less restrictions against Friday continue and we are unable to get licenses, we could see of worsening decline in our sales to evolve over the coming quarters.
Now turning to our market outlook, which assumes that the macroeconomic environment doesn't materially deteriorate from current levels.
Ill begin with our industry outlook, and then turn to microns outlook for DRAM and NAND.
The DRAM and NAND industry demand growth in the second half of calendar 2019 compared to the first half, it's primarily being driven by a normalization of inventories at most customers and secular growth trends in various end markets.
In recent months, we have seen increased demand from customers headquartered in mainland, China, some of whom could be making strategic decisions to build higher levels of inventory in the face of increased trade tensions between the us in China, as well as Japan and Korea.
Our view of calendar 2019, DRAM industry bed demand growth remains unchanged at mid teens with supply exceeding demand due to previously discussed factors that impacted first half calendar 2019 demand.
Based on over the early view of calendar 2020, we expect the industry to see bed demand growth of high teens to 20% above supply growth of only mid teens, which should help normalized supplier inventories and enable a healthy industry environment.
We expect the long term DRAM bit demand growth CAGR to be mid to high teens.
Turning to NAND industry outlook demand elasticity and industry supply deductions are resulting in improving market conditions and declining industry inventory.
On the supply side, Capex and wafer start cuts across the industry, our leading to supply deductions.
Our power outage at our competitors fab also reduce industry supply and inventory.
We now expect calendar 2019 industry best demand growth in the low to mid 40% range, which will exceed industry bed supply growth of approximately 30%.
Based on our view of calendar 2020, we estimate industry demand growth of high Twentys too low 30, percents range that supply growing somewhat below demand.
We believe that NAND industry margins, which are at the lowest levels in the last 10 years should start increasing for the rest of the year.
We expect the long term NAND bed demand growth CAGR to be in the low 30 percents range.
Specific to microns DRAM outlook, we are seeing solid demand from customers across multiple segments.
This is improving our inventory and we have started to see pockets of tight supply, particularly in leading edge nodes.
However, we still have elevated inventory levels on older nodes. As a result, we are continuing with the previously disclosed DRAM wafer start reductions of 5%.
We expect microns calendar 2019, best supply growth to be slightly below industry demand growth of mid teens and expect our calendar 2020, DRAM bit supply growth to be close to the market demand growth.
We also expect our DRAM cost reductions to moderate in fiscal 2022 high single digits.
As we've said before the increasing complexity of more advanced DRAM nodes is resulting in slower pace of cost declines for the industry.
As our DRAM inventory improves we are committed to maintaining price discipline, while we are having to respond to some aggressive market pricing. We have started walking away from some transactions as we look to optimize our profitability.
Turning to microns NAND outlook, we expect our calendar 2019 bed growth to be slightly above industry supply growth and in calendar 2020, we expect microns vis supply growth to be significantly below the industry demand growth as we transition.
Our limited portion of our wafer starts to our first generation replacement gate note and used inventory to support customer demand.
Supply growth will also be impacted by our previously announced wafer start reductions of approximately 10%.
We are seeing some capacity tightness in our backend manufacturing operations due to significant increases in demand for high capacity NAND products.
This is another data point of elasticity kicking in on high value NAND solutions.
While NAND andina market conditions are showing some promising signs in order to bring our supply in line with the market demand. We are targeting our fiscal 2020 front end equipment capex to be reduced by more than 30% from fiscal 2019.
Our Capex decision is also influenced by macroeconomic uncertainty and low industry profitability.
Our front end Capex outlook reflects our strategy for limited ramp of our first RG nodes.
While we are reducing front end equipment capex, we're spending significantly more on shelf space to enable future node transitions and also investing in a new SSD packaging facility in Penang Malaysia.
As always we will maintain flexibility and discipline, while investing appropriately for microns long term success.
I want to emphasize that our goal is to manage our DRAM and NAND bit supply growth CAGR in line with industry demand as we catch up on the technology and cost gaps to best in class competitors in DRAM and transition to RG technology and NAND, our supply growth may fluctuate, but we expect the medium to long term.
Growth rate of our supply to approximately equal the rate of demand growth across both NAND and DRAM markets.
We're also focused on maximizing the ROI of our Capex investments and for this reason, we're not emphasizing wafer capacity growth, but instead, focusing on best growth driven by technology transitions.
In addition, some of our Capex is dedicated to increasing our internal capacity for assembly packaging and test, which helps us drive cost reductions without adding any bed growth and has good ROI.
Ill now turn it over to Dave to provide our financial results and guidance.
Thanks Sanjay.
As Sanjay mentioned micron delivered resilient performance throughout a challenging year for the industry.
Hi, lighted by fiscal Q4 results that exceeded our guided ranges for revenue and earnings.
As market conditions of all during the year, we curtailed our planned operating expenses and capital expenditures.
Allowing us to preserve margins and generate healthy free cash flow.
We achieved our first corporate investment grade rating.
Strengthened our balance sheet and meaningfully reduced our share count.
All in all fiscal 2019 was a year of stellar progress that sets micron up per attractive growth as industry conditions recover.
Turning to our recent financial results total fiscal Q4 revenue was approximately $4.9 billion.
Revenue was up 2% sequentially and down 42% year over year.
Revenue exceeded our guidance range, largely due to better than expected demand.
For fiscal 2019 revenue totaled $23.4 billion down 23% year over year.
Fiscal Q4, DRAM revenue was $3.1 billion, representing 63% of total revenue.
DRAM revenue increased 1% sequentially and declined 48% year on year.
Pitch shipments grew approximately 30% sequentially and in the mid teens percent range year on year as customer inventories improved significantly.
ASP declined approximately 20% sequentially.
For full fiscal 2019, DRAM revenue was $15.2 billion down 28% from fiscal 2018 as bits grew in the low single digit percent range and ASP declined approximately 30%.
Fiscal Q4 net revenue was approximately $1.5 billion were 31% of total revenue.
Revenue was up 5% sequentially, but declined 32% year on year.
That shipments grew in the low to mid teens percent range sequentially.
ASP declined in the upper single digit percent range.
We're starting to see supply tightness in portions of the NAND market and prices are beginning to increase.
For fiscal 2019, NAND revenue was $6.9 billion down 12% for fiscal 2018, as ASP declines of mid Fortys percent range more than offset strong pet shipment growth.
Now turning to our revenue trends by business unit.
Revenue for the compute and networking business unit was $1.9 billion in fiscal Q4, a decline of 8% sequentially and down 56% year over year.
ASP declines across most segments continue to be the leading cause of lower revenue.
For the fiscal year revenue was $10 billion down 35% year over year.
Revenue for the mobile business unit in fiscal Q4 was $1.4 billion up 20% sequentially and down 26% year over year.
Both DRAM and NAND pits had strong growth driven by seasonality and continue content growth in smartphones.
Our mobile business gained share in the year driven by a stronger product portfolio.
For the full fiscal year end Bu revenue was $6.4 billion down only 3% from fiscal 2018.
Revenue for the storage business unit in fiscal Q4 was $848 million, an increase of 4% from fiscal Q3 and down 32% year over year.
For the fiscal year SP revenue was $3.8 billion down 24% from fiscal 2018.
And finally revenue for the embedded business unit was $705 million in fiscal Q4 up 1% from fiscal Q3 and down 24% from the prior year.
For the fiscal year Edu revenue was $3.1 billion down 10% from fiscal 2018.
The consolidated gross margin for fiscal Q4 was 30.6% above our guidance range due to our strong execution, improving demand and slightly better pricing.
Q4 gross margins included approximately 200 basis point negative impact were approximately $100 million due to the underutilization charges at IMF team.
Starting in fiscal Q1, and continuing for the foreseeable future, we expect to incur an under utilization impact of approximately $150 million per quarter.
With about half the impact consisting of non cash items.
Over time as our Threed Cross point business ramps this under utilization impact will be mitigated.
But as you can expect it takes time to commercialize new breakthrough technology.
Meanwhile, we will continue to look for ways to optimize our costs and will provide updates on material progress over time.
With respect to use tariffs on imports from China with continued mitigation, we were able to container impact on our consolidated gross margin in fiscal Q4 to less than 20 basis points.
Operating expenses were $797 million and included some onetime expenses.
We continue to control our expenses tightly and our SDMA as a percent of revenue is meaningfully lower than our competitors.
Fiscal Q4 operating income was $694 million, representing 14% of revenue.
Operating margin was down 38 percentage points year over year and down nine percentage points from fiscal Q3.
Our full fiscal 2019 operating income was $7.8 billion or 33% of our fiscal year revenue.
Our fiscal Q4 effective tax rate was 8.8%.
For the fiscal year, our effective tax rate was approximately 7.3% which included the tax benefit we recorded in fiscal Q3.
Going forward, we expect our tax rate to be mid to high single digits.
non-GAAP earnings per share in fiscal Q4 were 56 cents down from one dollar and five cents in fiscal Q3 and $3.53 in the year ago quarter.
For full fiscal 2019, our non-GAAP earnings per share was $6 in 35 cents down from $11 in 95 cents in fiscal 2018.
Turning to cash flows and capital spending we generated $2.2 billion in cash from operations in fiscal Q4, representing 46% of revenue.
For full fiscal 2019 cash from operations was $13.2 billion, representing 56% of revenue down from $17.4 billion or 57% of revenue in fiscal 2018.
Cash flow margins remained almost flat due to effective working capital management.
During the quarter net capital spending was approximately $2 billion down from $2.2 billion in the prior quarter.
For full fiscal 2019, our net Capex was $9.1 billion up from $8.2 billion in fiscal 2018, but down meaningfully from the $10 billion to $11 billion plan. We originally had entering fiscal 2019.
We expect our fiscal 2020 net capex to be in the range of $7 billion to $8 billion down meaningfully from fiscal 2019.
We expect a capex for buildings and Bakken manufacturing will increase significantly from last year, while the front end equipment Capex will decline more than 30% year on year.
Looking at cash generation, we generated adjusted free cash flow of approximately $260 million in fiscal Q4 compared to $500 million in fiscal Q3, and $3.1 billion in a year ago quarter.
Adjusted free cash flow for fiscal 2019 was $4.1 billion down from $9.2 billion in fiscal 2018.
We received notice for approximately $180 million of convertible note redemptions in the quarter.
Which will remove approximately 4 million shares from our ongoing share count in fiscal Q1.
For full fiscal 2019, we returned approximately $2.7 billion to shareholders in the form of buybacks, representing 65% of free cash flow at an average purchase price of $40.
Including these share repurchases and our convertible note redemptions, we reduced our average diluted share count by 80 million shares in fiscal 2019.
Representing 7% of shares outstanding.
We remain committed to returning at least 50% of our annual free cash flow to shareholders in the form of share repurchases in the future.
Days of inventory was 131 down from 143 days in fiscal Q3.
Inventory ended the quarter at $5.1 billion, increasing from $4.9 billion at the end of fiscal Q3.
We will continue to focus on reducing our days of inventory and expect to see further reduction in fiscal Q1.
As mentioned before we are seeing pockets of tight supply in certain parts of our business.
Our long term normalized inventory target has increased over time to above 100 days as a result of greater process complexity and the broadening of our product portfolio to high value solutions, such as ssds that require longer assembly and test time test cycle time.
Total cash ended the quarter at $9.2 billion up quarter over quarter, largely as a result of our 1.75 billion dollar investment grade debt issuance.
Our total debt increased to $5.9 billion.
Total liquidity ended fiscal Q4 at $13 billion.
We are holding approximately $1.4 billion of liquidity for the acquisition of the IMF tea joint venture expected in fiscal Q1 20.
This acquisition will eliminate approximately $700 million of member debt financing.
And we'll be funded by drawing down $1.25 billion from our term loan facility secured in fiscal Q4.
Before moving onto guidance I want to share some expected changes to our upcoming reporting.
We continue to evaluate planned technology node transitions capital spending and reuse rates for NAND equipment.
Based on our preliminary assessment.
We anticipate changing the depreciable life of our NAND equipment from five to seven years, beginning in fiscal Q1 20.
This change will reduce our depreciation expense included in cost of goods sold for Q1 by approximately $80 million.
And increasing to approximately $100 million to $150 million per quarter for the remainder of fiscal 2020.
As a reminder, depreciable life for DRAM equipment is already seven years.
Also starting in Q1, we expect to change how we report Emcp revenue, which we currently include within NAND revenue.
We will begin this aggregating emcp revenue into DRAM, and NAND, which will reduce our reported NAND revenue and margins in in Q1, while increasing our DRAM revenue.
We believe that this change will help improve the transparency of our DRAM and NAND businesses.
Now turning to our financial outlook as our portfolio strengthens and we improve our share in high value segments, we're seeing growing demand for both DRAM and NAND and this is creating pockets of supply shortages, particularly in some leading edge nodes and Bakken manufacturing.
However, the market remains competitive and industry inventories continue to adjust to economic and geopolitical uncertainties.
Notwithstanding these challenges we expected shipments for both DRAM and NAND to grow in fiscal Q1, while NAND in with NAND, increasing more than DRAM.
With that in mind, our non-GAAP guidance for fiscal Q1 is as follows.
We expect revenue to be in the range of $5 billion, plus or minus $200 million.
Gross margin to be in the range of 26.5% plus or minus 150 basis points.
And operating expenses to be approximately $780 million plus or minus $25 million.
Based on our share count of approximately 1.13 billion fully diluted shares we expect EPS to be 46 cents plus or minus seven cents.
Despite a variety of industry and trade related challenges in fiscal 2019, Micron delivered strong financial results.
And our 2018 analyst day, we laid out how we believed micron with structurally improved and able to weather the storm even challenging periods for the industry.
While we're now not out of the words, we are pure out of our execution and we have moved throughout through the as we while we are not of the woods. We're proud of our execution as we have moved through the current cycle. We are exiting the fiscal year with a stronger product portfolio deeper customer relationships and our highest liquidity and net cash position.
And to date and we have also made good progress on our share buyback buyback program.
We are well positioned to emerge from the current cycle ready to capitalize on the secular growth trends driving our business.
I'll now turn the call over to Sanjay for concluding remarks. Thank you Dave fiscal 2019 has been a solid year of accomplishments for the new micron as we continue to focus on structural improvements across a range of functions and the company today color performance to new Heights.
While we have made dramatic progress over the last couple of years that a significant unfortunately ahead of us to further improve other operations drive product cost reductions for that improve and generating execution build on our go to market strategy and initiatives deepened can split engagements and enhance the core competitiveness of the comp.
Me too best in class levels.
As we look ahead, the long term unfortunately that exciting and we had extremely enthusiastic about the momentum we have established at the new micron.
On October 24, we'll be hosting our second anvil micron insight event, which will bring together leaders from across the industry to discuss how award activated by data can transform the baby use information to enrich life, and how memory and storage I'd like to them to these efforts.
We will be webcasting micron insight life from San Francisco and I encourage you all to tune in.
We will now open for questions.
Thank you as a reminder to ask a question you want me to pass style line on your talent found.
In order to allow as many analysts to ask a question as possible. Please limit yourself to one question.
Our first question comes from Matt Delaney with Goldman Sachs.
Yes, good afternoon, and thanks for taking the questions. So good to talk a little bit about your customers' inventory levels and one of the concerns or debates in the financial community at the moment is whether the pickup and memory volumes that does I think microns Dana that is that mostly being driven by fundamentals or is this just.
Potential inventory stocking because it's on the trade concerned and.
Thank you may be talked about a bit of both factors in your prepared comments and at some some potential inventory start but also inventory coming down at some important markets like data center. So maybe you just kind of level setting, but those things together and do you think the pickup in your business is it primarily being driven by fundamentals are or how much theres, maybe some of that inventory stocking now because trade concerns. Thank you.
I think certainly the pickup in business is being driven by the industry fundamentals I will just like to remind you that in the first half of calendar 2019, because of the inventory that the customers has built had been.
The demand to the producers was low yet the end market demand for all applications continue to be robust and now as the customers have broke down that inventory to normal levels that demand is coming back to the producers and as a result, you saw in calendar Q4, I mean fiscal Q4.
There are those a strong growth in DRAM bit as well as NAND and.
The second half is the demand is back the customer demand is back and yes, there may be some level of inventory build in China due to the reason that I've mentioned by certain customers, but I'll tell you that we do not paying bet that inventory build as any of that flows through the kind off inventory build that had gone on in the second half of.
Last year so.
No we have materially close to that level. So overall the industry environment in terms of demand return is certainly solid.
Certainly in DRAM, there's still some supply and excess supply of with the producers, but the inventory is improving fast we talked about broad inventory actually improving faster than would be but has anticipated sometime ago and our overall, if we even see some shortages in some.
Leading edge products.
But clearly on the DRAM side, so all the RV paying that industry inventory at the producers is being.
Consumed at a rapid clip the demand trends are back to normal levels, and especially when you look at the trends off.
Through next year Fiveg, you look at smartphone average capacity is continuing to increase both for NAND and DRAM and cloud.
Man drivers continuing to be solid new platforms, New CP architecture is being used that allow greater use and higher to use of BLM capacities as well as the applications driving more DRAM and NAND. So the demand trends when I look at.
2020 I believe that.
The industry demand supply environment will be in a large healthier place, yes, maybe calendar Q1 may have some cyclicality, but the industry fundamentals overall from demand supply point of view I think in 2020 will be in a much healthier place another way to look at this and kind of back it up mathematically as if you look at the year over year.
Big growth.
In the fourth quarter, it's only in the kind of 14% kind of range. So that kind of backstop. The idea that this is really about industry fundamentals.
More so than it is about.
Stocking inventory.
Thank you all our next question comes from John Pitzer with Credit Suisse.
Yes, you guys congratulations on solid results given the macro uncertainty.
I have several questions just around the did guided gross margins for the fiscal first quarter well. If you look at the incremental you take your ticketing from Imus key that's more than offset by kind of the change in depreciation and yet you still kind of getting sort of a 400 basis point dropped sequentially in gross margin on kind of flattish to up Bob.
And I know you guys don't comment about future pricing, but can you talk about other puts and takes around mix, but might be negatively impacting kind of the gross margin and I guess, given what the incremental costs. All biomass key is probably driven by you taking receipt of the whole joint venture in the month of November .
Why wouldn't that hit get higher NGL onto the fiscal second quarter and added to the full quarter.
Okay.
So, yes, let me kind of walk through a little bit of the puts and takes obviously pricing is a factor in the expectations around gross margins for the.
First fiscal quarter.
And of course, we don't talk necessarily about forward pricing, but.
The second piece is cost.
And as Sanjay mentioned, our cost declines for fiscal 20, and total will be kind of high single digits thats lower than the cost declines we got fiscal 2019 versus fiscal 2018.
And so we are seeing us slower rate of cost declines for DRAM.
And Thats.
Of course.
Something we've indicated was coming given the complexities.
We face in as we migrate nodes.
And as we talked about obviously on the NAND side, we're going to have very minimal cost declines as we kind of transition to replacement gate. So those are certainly factors in that and I would tell you that the first quarter cost declines or.
Our very minimal the third pieces mix.
If you look at the mix from just a move to high value solutions that of course of positive, but what is overshadowing that is the mix of NAND and DRAM and of course NAND has lower gross margin than than DRAM, and we are we will see likely a higher mix of NAND.
Next quarter, which will affect gross margins negatively and then as you pointed out there is to kind of unusual items I guess in the quarter one is the.
The change in the useful life of NAND equipment that will be positive, but more than half of that will be offset by under utilization expenses.
Associated with.
With I am at Ti. So those are kind of all the puts and takes of gross margins.
I think it's likely that it will be a little higher from Q1, two Q2 in terms of under utilization expenses, but it was somewhat in the noise in what we might be a little bit lower than 150 $150 million of on utilization expense in fiscal Q1, and what might be a little higher than that in fiscal Q2.
Thank you. Our next question comes from Mitch Steves with RBC.
Hey, guys. Thanks for taking my question is trying to get to poke again on the gross margin questions are fast, but little one of the bigger question.
Your commentary about pricing getting better, but then you're talking about gross margins joint down at a higher revenue base. So if you offset that with depreciation as well and does that imply that November quarters tribute to bottom for gross margins are you guys imply that February could also be down sequentially.
Well I think clearly we're talking about NAND getting better and we are seeing the early signs in DRAM of kind of fundamentals getting better demand is coming back inventories on our balance sheet and on.
The industry's balance sheets are coming down of course that hasnt gotten completely to where it needs to be.
And also as Sanjay mentioned in his prepared remarks, you know the market continues to be of a competitive and so.
It will have to see when that all those things come together and and supply kind of aligns with demand.
To drive more healthy market for our healthier market for DRAM.
Thank you. Our next question comes from Highland Sally GPS.
Good afternoon. Thank you for taking my question on your fiscal 20, DRAM outlook for high single digits cost reductions versus fiscal 19 is that how we should think about your longer term annualized cost profile given the higher complexity capital intensity that you outlined or just some impacts from the pullback in utilization.
In his drawdown of your own inventories in and or May be a slower one Z transition thats impacting the cost on profile as well.
We definitely have some on utilization expenses in DRAM, certainly we have that built into our expectations for the first fiscal Q quarter. It may last into the second fiscal quarter.
And so thats certainly has an impact but I would tell you that over time.
As complexity of these nodes.
Goes up and as capital intensity goes up the cost declines are going to become more challenging so that the high single digit.
We will probably not be something we can routinely do year to year.
And I'll, just add that general via certainly narrowing the costs gap in terms of DRAM production cost a little.
One the known as a good example of microns leadership being the first one to introduce among the note with the smallest feature size in the industry and the result of cost improvements that we're making on DRAM as well as of quarter. The high value solutions that are driving higher mix on demand side is.
Major improvement Ptwenty 500, plus basis points improvement in on EBITDA margins.
Versus the competition.
Compared to the past 2016 timeframe.
Thank you. Our next question comes from Mike Newman with Bernstein.
My question.
The.
Yeah.
Okay numbers or not.
Right.
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Yes.
Yeah.
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To.
Steve.
Yeah.
Good condition.
Yes.
Yes.
Good morning.
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Yes.
Right.
Yeah.
Yes. Please.
So Dave will comment on your inventory part of the question, but let me just address your question on the 96 layers.
As we've said before 96 Lear execution has gone very well at the company in terms, so you'd ramp 96 clear technology have given of the fastest yields ramp of other any other NAND technology is in the past. So we're very proud of that accomplishment and 96 live is continuing to ramp during the course.
For fiscal year 2020 in fact, 96, there will be the major driver of our NAND bit growth.
In fiscal year 2020 as I mentioned in my prepared remarks with respect to replacement gate vs theme now functionality and yielding dive.
Certainly.
Quite encouraged by that and continued to work on technology and product development in fiscal year 2020 .
On 60, 496, Clare will continue to be the workhorse technologies and our replacement gate technology of course will have a small mix in fiscal year 20.
For us as well keep in mind, our first replacement good gate Nord, which will have.
Small production in fiscal year, 20 will be another limited node, because we'll be deploying it across the next set of Florida.
It's our second generation node, which will of course come in the subsequent fiscal year that will give us.
Position us well for I ended June the year over year strong cost reductions, Florida.
But basically the 96 Clare will continue to them producing.
Fiscal year 20 floater.
Okay. So on the on the inventory question.
If you. So we had a 143 days of inventory in the third quarter that came down to 131 days.
In the fourth fiscal quarter, if you kind of break that out between DRAM and NAND DRAM was meaningfully below that and NAND was meaningfully above that I would say in terms of days, obviously in absolute dollars DRAM as more inventory than that.
I would say that was you got to remember there are two reasons why inventory was building for NAND. It was building as we kind of slowed down our supply, but customers were working down their inventory now weve. The adjustments we've made to our supply both in terms of capital spending reductions and.
In terms of utilization.
Adjustments, we have brought our inventory down pretty meaningfully this quarter, we expect to bring it down again meaningfully.
Next quarter on the art on the.
The NAND side, we have elevated levels of inventory, but thats more strategic what we're trying to do is.
Have some built up inventory in fiscal 19 that we can use in fiscal 20 to support the RG transition because the replacement gate transition will not drive a lot of bit growth and so in order to submit support the increased demand next year, we will have to utilize this inventory for that purpose.
Thank you. Our next question comes from CJ Muse with Evercore.
Good afternoon.
Thanks for taking the question I.
I guess one view.
No you commentary around DRAM.
And under growing industry in COVID-19.
Is that largely driven by way.
Perhaps more aggressive.
Competitors in certain markets change in mix.
I would love your thoughts on that and then as we move into calendar 20, what are your expectations busy in the market for your market share. Thank you.
So in terms of overall, there with respect to DRAM growth in terms of.
Revenue I mean.
It has primarily been impacted by the customer inventories that were built up last year for the first half and our overall.
He them.
Shipments are in line with overall the industry in this regard and I think what we said is that.
The industry demand mid teens, and our overall supply growth during the COVID-19 to be slightly below the industry of course as a result of some of the under utilization.
Actual that we have taken.
And of course, there is an impact of Bavi in terms of volatile oil business, we have said before that compared to.
The levels that we anticipated before while this placement on the entity listing our revenue is lower.
And of course, we are very much focused on continuing to diversify our revenue base.
But yes, I mean the hobby.
Entity listing does have an effect on some of our shipments to the customer I mean is some of our overall shipments in the market.
Thank you Sir our next question comes from Largey Gill with Needham.
Yes, Thanks for taking my questions that you had mentioned that you did see some elevated inventory levels in the lower process knows I wonder if you could kind of elaborate on that particular comment.
This is really related to some of our overall.
A production mix and if some of the older nodes.
I have.
Lower demand compared to our total supply available and therefore, that's where we are primarily running under utilization on the DRAM site.
So it really is about overall demand and this is.
Good inventory, that's an overall ville get consumed over time.
Thank you I next question comes from entering weakness with Wells Fargo.
Yes, thanks for taking the questions I was wondering if you could help me parse out the capex guidance, a little bit more detail I know last quarter relative to the 9.1 billion you did for the full year, you talked about roughly 2 billion.
For kind of clean room in facility kind of Capex.
Was that the case and I think on the basis of that what is that kind of capex.
And specifically embedded into your fiscal 2020 guidance.
Yes, it was a little bit lower than than the 2 billion number, but certainly a meaningful part of our spend and.
You could probably parse out from what Sanjay said, we expect that number to increase in fiscal 2020.
And.
And the opposite is we expect.
Front end equipment spend to decrease.
In fiscal 2020 versus fiscal 2019. We also are was who obviously make another investment in in the back end and we're expecting that to be roughly similar to two what we're spending enough.
We spent fiscal 2019.
Thank you. Our next question comes from the JV catch with Mizuho.
Hi, guys. Just wondering on the same Capex line I know you guys talked about Capex being thought it could bank FX being down 30%. So.
Let's see what close to 5 billion for fiscal 20, just wondering what the spread could be and then do them. Thanks.
We don't tend to break that out.
But I guess I would just tell you that our plan is to reduce our front end equipment spending both DRAM and NAND next year.
Thank you and your next question comes from Mehdi Hosseini.
Yes. Thank you for taking my question.
Two follow ups.
We talked about the demand trends or positive, but I want to get a better assessment of how do you see datacenters there has been some.
Conversation industry that.
Data center demand is seasonal some argue that is better than seasonal and at Sungy I want to get show you. How do you see to get us into demand for both.
Steve and add.
So the DRAM is tracking and in that context, I'm surprised we view NAND bit demand projection for next year. This is well below historical trend of new 40%. What do you attribute these NAND demand trend into 2020, which in my opening these will be goes.
Trend line.
So with respect to them and then demand trend in 22 at calendar year 2020 I mean, just keep in mind that.
In calendar 2018.
The industry grew by approximately 45% in calendar year 19, again, you know by about 45% are so low fortys to 45%.
And the you know that then definitely I mean, when you look at a multi year CAGR is I think it really does lead to calendar year 20 to be approximately.
In low thirtys.
On a problem.
In that range.
Hi at Twentys too low thirtys kind of range in terms of calendar year 20, and I think in on what you have to your line is is that with such aggressive pricing decline that had occurred in NAND over 2018 in 2019 timeframe.
Elasticities definitely has kicked in substantially and you too as we said.
I think environment actually has started improving in NAND.
And some of the.
Average capacity growth that you, perhaps would have seen next year actually has been appointed in faster into this year as that is out of some of these aggressive price declines that have occurred and have driven the usage of higher to capacities in terms of.
Imposing average capacities of ssds infusing the attach rate of ssds as well as continuing to drive higher average capacities in the smartphone market as well.
So you know these are some of the factor that absolutely thing and important role in terms of I'll, let assessment that for calendar year 20, the year over year bed growth will be high twentys to liquidities range.
Again keep in mind that you know we still are few months away from next calendar year. It and we of course will continue to assess you know the overall.
Industry demand trend, but this is our latest prediction on that your first question was that around cloud and let me just point out that you know cloud definitely demand.
Grew nicely for us on the downside in F Q4 .
Strong demand increases and yes, the cloud demand from time to time can be somewhat lumpy. However, overall demand growth trends on the cloud side continue to be solid in fact VC cloud.
Demand consumption, both for de them as well as for us as these.
Continued to be higher than the average of the respective DRAM and NAND industries. So overall cloud again, new architectures, new CBU platforms that ideally in enabling more channels as well as usage of higher density of Edina Oems as well as again as this.
Earlier, you know the trend of applications all of this is driving.
Greater usage of memory and storage in cloud supply would we see ads.
Absolutely strong 'cause it cloud customers inventories have normalized and it's back to normal levels other than any aspects, but half in China as I talked about off maybe.
Some element of strategic inventory build by certain customers, but overall the cloud demand trends are solid.
Thank you.
Our next question will come from Anthony Srivastava with BMO.
Hi, Thank you I just wanted to get back to NAND for fiscal two any and I just wanted to reconcile the comments you have made.
And wanted to make sure I'm walking away with the right take away.
Is that.
You have limited cost down and then you also talked about fairly low gross margin and then you also selling from already built inventory. So what's so what's the cadence between all these factors as they compare your profitability NAND versus competition in fiscal 2000.
So I think in fiscal two NT. The main focus let us on NAND will be to continue to increase the mix of high value solutions I think in mobile you have seen us increase managed and solutions in terms of share gain for substantially.
And I reported in my prepared remarks on the tremendous progress that we have made with our mobile business and most of its driven by the progress in the Manish NAND site and we plan to continue to.
Is that part of the business in fiscal year 2020 I also spoke about Ssds FSD was certainly a headwind in terms of shared unfortunately for us in fiscal year 19, and as we now have expanded our portfolio of Nvme solutions actually have introduced out first nvme solutions during fiscal year nine.
Now, we can leverage those solutions to expand our opportunities in fiscal year, 2020 and we certainly look forward to gaining share in if resuming gaining share in.
FSD on fiscal year, two Andy So I think that those are important pieces of our strategy of continuing to drive healthier.
Revenue mix of NAND in fiscal year, 2020 and of course extremely focused on cost reductions on assembly test and non memory bomb as well which are important factors.
Early when it comes from products like Ssds are multi chip packages et cetera, and we're making good progress on cost reductions on non memory part of the bomb as well. So these at all the portion do put us in fiscal year 20.
But no question that at the die level, both our cost reduction capabilities will be overall limited in terms of the cost reductions.
Thank you do not do you transition that we talked about earlier.
Thank you and your final question will come from Joe Moore with Morgan Stanley .
Great.
Mr. Mike.
Your line is open.
Yes, Hi can you hear me.
Yes.
Sorry, Yes, I Wonder if you could talk about what's your you forecasted demand will accelerate next year on the DRAM side.
Can you kind of break that down between units in content and just generally what's your expectation for.
I'm content for smartphones and servers next year.
I think on.
Smartphone side in beverage de them content. If you look at did this year.
I think fees by nearly 25%.
Slightly above three was the average three gigabyte with average capacity last year expected to be in calendar year 19 around four and pretty similar double digit gains continuing fiveg. If you look at mobile World Congress uniforms that were introduced there were.
Gigabyte and drove gigabyte Ed.
The them density in those phones, so as Fiveg fourth start selling in the marketplace. Some of those ones I've already introduced in the market today in some parts of the world and this will continue to build momentum during calendar year 20 and years beyond at this month will also required more beat.
Time, and again the forms are becoming more and more feature rich Moore AI applications are being built into the smartphones today and rich video and imaging capability and Lockwood intelligence behind all those applications. They require more DRAM as well so looking at next year, we will certainly be seeing.
Continuing average capacity increases next year as well in fact in.
Calendar year 2020 , if you look at industry projections. It average capacity is expected to increase another 20% next year going to something closer to five gigabyte per smartphone.
Thank you ladies granted report as I said before the DRAM is not only about smartphone its other applications in related to third world as well there. The average content continues to increase as well as average content continues to increase in Pcs as well with applicator.
One such as a gaming driving higher dean for more detail.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.